Egypt and other emerging markets prepare for the opportunities and challenges of the fourth industrial revolution

Overview

The global economy is entering the Fourth Industrial Revolution (4IR), or Industry 4.0, based on the application of new digital and automated technologies in production processes and service delivery. These changes are presenting emerging markets with opportunities such as improved productivity, as well as risks, namely reshoring and the displacement of human labour by automation. Wealthier emerging markets, such as the Gulf states, that have the resources to invest in new technologies, and those with better established manufacturing sectors, such as countries in Southeast Asia, appear best placed to reap the benefits of the 4IR. Many of these economies are putting in place strategies to manage and encourage the transition towards Industry 4.0. Meanwhile, other regions have shown signs of so-called premature deindustrialisation. In particular, Latin America and Africa seem more vulnerable to threats arising from technological changes and at greater risk of being left behind. To avoid such a fate, they need to adopt new innovative strategies that will allow them to leapfrog existing stages of industrial and infrastructure development.

Background

Klaus Schwab, founder and executive chairman of the World Economic Forum argues that the world is currently entering the fourth industrial revolution, which is “characterised by a fusion of technologies that is blurring the lines between the physical, digital and biological spheres”. There are a number of emerging technologies expected to play significant roles in 4IR, including robotics, artificial intelligence (AI), the internet of things (IoT), machine-to-machine (M2M) communication, virtual reality and 3D printing.

Robotics

Arguably the most consequential area of 4IR-related technology in terms of its impact on labour markets and manufacturing jobs is robotics and other automated processes. Klaus Prettner, professor of economics at the University of Hohenheim in Germany, told OBG that the use of robotics and automated processes in manufacturing started to take off in the 1990s and has been expanding rapidly, posting annual growth rates of around 12%. “Until recently robots were used largely for work that was too dangerous or difficult for humans, but now the technology is improving and becoming more cost-effective, allowing it to be used for an ever-wider range of applications,” Prettner said.

Use of the technology is generally concentrated in automotives, electronics and electrical equipment, and machinery production. While robots have generally struggled to work with smaller parts that made them less suitable for other industries, this is now starting to change, and so-called lights-out manufacturing factories that can operate without human presence are already in existence, namely in North-east Asia.

3D Printing

Also known as additive manufacturing, 3D printing is the computer-controlled production of three-dimensional objects from digital models. The technology is now widely used to create a range of products, from prototypes to highly customised mechanisms, in a manner that is more efficient and cost-effective. An example is the manufacturing of hearing aids, which need to be individually moulded to the ear of the wearer. “Hearing aids used to be produced manually, which was a complicated process, but now manufacturers can simply scan the ear and use a 3D printer to make the product,” Prettner told OBG. As a result of such useful applications, 3D printing has witnessed a significant boom since 2008. However, as the technology matures, growth rates will likely level off.

Virtual Reality

Virtual reality is also useful for the process prior to actual production, allowing designers to explore and interact with virtual renditions of their products and to identify any design flaws and safety issues. This is valuable for industries producing large, complex and expensive goods. The technology is already being used for such purposes in the aviation manufacturing industry, for example.

AI, IoT & M2M

AI, IoT and M2M communication are at an earlier stage of development than robotics, making their impact on industry harder to gauge. AI is not as widely deployed in the service sector as anticipated; nonetheless, it could have numerous applications in manufacturing and related activities, such as in the field of autonomous vehicles, which combines AI and IoT technologies. “Autonomous vehicles, should they take off, have enormous potential to drastically change logistics and supply chains,” Prettner told OBG. He forecast such vehicles to be available on a large scale within 10-15 years. IoT can also enable machine parts in both industrial components and in consumer products to automatically send alerts when they malfunction or need replacing, further improving industrial efficiency.

Pace of Change

While Schwab has argued that technological change is taking place at an exponential and unprecedented pace, other observers differ in opinion regarding the speed at which 4IR will take place. Prettner told OBG that the impact of 4IR-related technologies would be felt gradually. “There won’t be a real revolution in the foreseeable future,” he said. “While such technologies may work to reverse the decline in productivity growth that has been witnessed in recent decades, this will probably not bring them back to the levels seen in the mid-20th century.”

Some observers argue that change could be even slower. US economist Robert Gordon observed that there are major barriers to designing robots that can take over many roles currently performed by humans, and that the pace and impact of change was much higher between 1980 and 2005 than it is today.

Efforts to automate industrial processes have not always gone smoothly. In April 2018 Elon Musk, CEO of electric car manufacturer Tesla, told local media that the company had engaged in “excessive automation” at its facilities, and that this partly contributed to its failure to meet production targets. He added that salaries for engineers to maintain robots could sometimes outweigh the savings involved in their use.

Risks

For emerging markets, one of the most prominent risks from automation is the reduced need for lower cost and unskilled labour, making it less attractive for industry to outsource production away from their main consumer bases. This risks exacerbating a trend already under way in some regions – notably in parts of Latin America and Africa – towards what economist Dani Rodrik has referred to as premature deindustrialisation. The process has been driven by various factors, including rising competition from China; however, increased automation in developed economies such as the US, which lessen the attractiveness of cheaper labour in developing countries, also appears to be a contributing factor. A March 2018 report by the Overseas Development Institute (ODI) found that even in the relatively low-tech furniture manufacturing industry, operating robots in the US could become cheaper than paying workers in Kenya by 2033. Prettner cited new highly automated production facilities built in Germany by Adidas for the manufacturing of trainers – a product generally produced by low-wage workers in Asia– as an example of Industry 4.0-enabled reshoring.

South-East Asia

Of the emerging markets covered by OBG, Thailand is arguably leading the way in terms of technological development, thanks in large part to its already high level of industrial growth. For example, it is the sixth-largest vehicle producer in the world.

In 2016 the government launched the Thailand 4.0 strategy, with the goal of developing innovative and high value-added industries in order to achieve high-income status. The strategy includes the development of technology clusters and start-ups based around 4IR technologies such as robotics, IoT and biotechnology, and overlaps with the Eastern Economic Corridor strategy to create growth hubs in three eastern provinces.

Other countries in the region are also following suit. In April 2018 Indonesia launched its 4IR-oriented strategy, Making Indonesia 4.0, which the government expects will help boost annual GDP growth by one to two percentage points. The strategy focuses on five priority sectors, namely food and drinks, automotive manufacturing, textiles, electronics and chemicals.